Brexit Exodus: Luxembourg Holding Winning Hand?

Stockholm (HedgeNordic) – After the United Kingdom voted to leave the European Union in the summer of 2016, British and global asset managers relying heavily on UK fund regimes are setting up new fund ranges in other European jurisdictions in order the retain their European client base. Asset managers are taking action in response to mounting concerns that they may not be able to target European investors with UK-domiciled funds, and vice versa. Due to ongoing uncertainty over Britain’s relationship with the EU after the Brexit in March 2019, an increasing number of asset managers and other firms have been taking preventive actions by setting up fund ranges or relocating jobs and offices in the Grand Duchy of Luxembourg and other European jurisdictions.

Luxembourg: destination of choice for relocating UK-based firms

There are too many known unknowns and unknown unknowns related to the process of the United Kingdom leaving the European Union, with many asset managers and financial firms conducting business in Europe from a London base being decisive amidst uncertainty and ambiguity by taking preventive relocation decisions. Despite the cultural and geographical proximity of Ireland to the United Kingdom, Luxembourg appears to be a location of choice for the majority of companies which have embarked on projects to relocate parts of their businesses from the United Kingdom to other European countries. Based on relocations announcements through the end of August, accountancy firm KPMG reports that 41 companies, the great majority of which are financial firms, decided to relocate to Luxembourg, compared to Ireland, which managed to attract 30. Most companies relocating to Luxembourg to maintain access to the European market come from the asset management and insurance industries.

Whereas more firms are announcing jobs and office relocations to mainland Europe in order to retain the business advantages of EU policies, asset managers are different beasts and are not preparing for a mass exodus of staff out of the UK. Under the so-called delegation model, British asset managers just like fund managers located elsewhere are allowed to domicile funds in Luxembourg or Ireland and distribute them across the European Union without substantial presence in the EU while delegating certain functions such as portfolio management back to the UK. One of the biggest concerns for the asset management industry remains the delegation of portfolio management rights after the European Securities and Markets Authority warned against the emergence of EU letter-box entities.

Both the European Fund and Asset Management Association and the Financial Conduct Authority (FCA) in the UK, however, agree that existing delegation rules must remain unchanged post-Brexit. In April of this year, FCA’s chief executive Andrew Bailey, said that “the truth is that delegation is a well-established global norm not dependent on EU membership. There is no reason to disrupt a system that clearly works effectively.” With the delegation model not anticipated to suffer any changes, one solution enabling UK-based asset managers to serve European investors post-Brexit is to form regulated special purpose vehicles known as ManCos, or management companies, either in Luxembourg or Ireland.

Luxembourg or Ireland: the preferred choice among asset managers?

With more UK-based asset managers putting Brexit contingency plans into action, Luxembourg is emerging as a top choice for asset managers seeking to maintain sales presence across the European Union post-Brexit. According to the 2017 annual report recently released by the Luxembourg financial regulator, CSSF, the number of authorized investment fund managers in Luxembourg increased to 306 at the end of the year from 296 recorded a year earlier. A total of 15 fund managers registered to operate in the country. The annual report also reveals that the number of people working in the Luxembourg investment industry rose around ten percent to approximately 5,000 individuals.

According to a report released by consultancy firm PwC, around 60 percent of UK-listed funds and 80 percent of alternative funds may need to set up ManCos and Europe-domiciled fund ranges to allow the continuity of service for European clients. Both Luxembourg and Ireland represent good options for global asset managers seeking to serve European investors post-Brexit, but, Luxembourg appears to be holding the winning hand for a number of reasons. Luxembourg is currently the largest fund center in Europe and the second-largest in the world after the United States. More importantly, Luxembourg is a main cross-border hub for funds in the world.

Several recent studies and surveys seem to suggest Luxembourg represents the top choice for asset managers preparing their distribution activities for the EU-market post-Brexit. For instance, a recent survey conducted by State Street among 250 global asset managers shows Luxembourg will strengthen its European dominance as a fund domicile, fund servicing and distribution hub. Around 46 percent of survey respondents currently use Luxembourg as domicile for their products, with a much larger share of 62 percent anticipating to use Luxembourg as fund domicile in five years. Meanwhile, 42 percent of respondents reported using Ireland as domicile for their funds and 55 percent of them indicated plans to have products domiciled in Ireland in five years. Another survey done by Ernst & Young among senior management employees from 55 wealth and asset management firms shows that the majority of firms plan to set up entities in Luxembourg (41 percent) and Ireland (37 percent) as a result of Brexit.

According to Simon Turner, Wealth and Asset Management Partner at Ernst & Young, “Contingency planning for Brexit is becoming increasingly advanced as one would expect, with a number of firms actively establishing new entities or focusing on strengthening their existing ones. Luxembourg and Ireland come out top, in terms of the desired locations of our survey respondents. This is likely to be due to the existing presence of asset management in those locations, a known regulatory environment, access to strong talent and local infrastructures. But, it has to be said that total relocation numbers remain low, which might not have been expected a year ago.”

How is UK’s hedge fund industry affected by Brexit?

The United Kingdom has the largest hedge fund industry in Europe, with more than half of Europe’s hedge fund managers being based in the UK. The United Kingdom will most likely become a third country after Brexit for the purpose of the European Alternative Investment Fund Managers Directive (AIFMD), which would theoretically allow UK-based alternative investment fund managers (AIFMs) to access European professional investors directly post-Brexit. Despite this possibility, a number of UK asset managers announced plans to set up so-called Super ManCos in Luxembourg and Ireland, management companies authorized under AIFMD and UCITS allowing groups to sell both alternative funds and traditional UCITS to European investors. Better be prepared than sorry.

Although a number of asset managers, including Legal & General Investments which opted to launch a Dublin-based Super Manco, are transferring assets managed for EU clients to Ireland, more than a few big players in the finance industry and the asset management industry in particular are choosing Luxembourg. In the summer of 2016, M&G Investments, an asset manager with £285.8 billion in assets under management, announced its intention to set up a new range of funds in Ireland to sell to European investors, but the asset manager ultimately decided to transfer £34.2 billion of non-sterling share classes to Luxembourg. M&G Investments announced plans to set up a Super ManCo in Luxembourg, launch a new family of Luxembourg SICAV funds by March 2019, and set up another Luxembourg-domiciled legal entity that will carry out distribution of the Luxembourg management company’s funds and services. Columbia Threadneedle Investments also plans to transfer assets from UK-domiciled funds to its Luxembourg SICAV vehicle. The asset manager is set to launch 13 new funds on its SICAV platform to accommodate the transfer.

About Author

Eugeniu Guzun serves as a data analyst responsible for maintaining and
gatekeeping the Nordic Hedge Index (NHX), as well as being a novice columnist covering the Nordic hedge fund industry for HedgeNordic.
Prior to joining HedgeNordic, Eugeniu had served as a columnist for a U.S. journal covering insider trading activity, activist campaigns and hedge fund moves. Eugeniu completed his Master’s degree at the Stockholm School of Economics in 2018.